On the outskirts of Klobikau, some 30 miles from Leipzig and deep inside the former East Germany, wooden stairs are mounted against the side of a hill, the only feature on the flat agricultural landscape. At the top, a dirt track curls across the ragged summit to a cluster of decaying buildings and a wooden watchtower.

The hill is artificial, built of waste dug from a huge open-cast coal mine long since abandoned. During what the locals refer to as the former times, the buildings housed Soviet SS-20 nuclear missiles. The watchtower is new, erected to allow visitors a better view of an unlikely regeneration project, which aims to turn the site into a thriving eco-park.

Water diverted from a local river is steadily turning the land into one of Germany's largest lakes. Beaches and wildlife refuges are planned and on the lake shores thousands of trees are being planted. For that, you can thank, among others, Barclays Bank, the Brit Awards, ITV, British Gas, Coldplay, Avis, Volvo, the Conservative party, Honda and Dido.

The tree planting is managed by the Carbon Neutral Company, a British firm that offers individuals and organisations the chance to erase the environmental damage caused by their greenhouse gas emissions. Trees soak up carbon dioxide, the thinking goes, so planting a new tree can neutralise some of the carbon produced by driving a car, flying a plane or turning on the television.

Across the world, thousands of projects aim to cut carbon emissions through reduced energy use or conversion to renewable sources. The notional "carbon credits" such projects generate can be sold, and there is big money to be made: HSBC recently paid £420,000 to buy enough credits to offset just three months of its carbon emissions.

Whether driven by a desire to save the planet or a sense that "going green" is a powerful marketing tool, carbon offsets are everywhere. Need to book a British Airways flight to New York? Want to buy a new Range Rover or petrol from a BP garage? Simply click on the web link, do the sums and pay £20 or so to neutralise your contribution to global warming.

Mass purchase of carbon credits allowed the organisers of this year's World Cup to declare it "carbon neutral". Ditto the makers of the Al Gore film An Inconvenient Truth, and the civil servants who arranged last summer's G8 summit at Gleneagles. Last week, Hampton School in Middlesex announced it had become the first carbon neutral school in the world, after paying £5,000 to Climate Care, the other major British offset firm.

Offset schemes may be popular but they are controversial. To some, they are simply no substitute for emission cuts.

Kevin Anderson, a scientist with the Tyndall Centre for Climate Change Research, said: "Offsetting is a dangerous delaying technique because it helps us avoid tackling the task. It helps us sleep well at night when we shouldn't sleep well at night. If we had gone to the limit of what we can do in our own lives then I could see it would be a route to go down, but we've not even started to make changes to our behaviour. I'm sure the people attending the G8 summit didn't need a separate limo and Merc each to pick them up. But to then claim that the problem is dealt with by planting a couple of trees or whatever is worrying."

Not surprisingly, perhaps, Mike Mason, the founder of Climate Care, disagrees. "I would advocate very strongly that people should reduce their emissions but I'm not going to let that get in the way of me selling carbon offsets to people who won't," he said. "We've all got to climb Mount Climate Change and the greenies would like us to put on our crampons and ice axes and go straight up the north face. I'm saying there are an awful lot of people who can't or won't or who need to be led, so maybe we can find a path round the back instead."

Business in offsets is soaring. About £60m worth have been bought globally this year, up from £20m in 2005. Within three years the market is expected to top £300m. But doubts are growing. Trees are a risky store for carbon and the anticipated 30,000 tonnes of savings from the Klobikau plantations will be delivered only if the trees last 100 years. Oliver Rackham, a botanist and landscape historian at Cambridge University, helped the environmental group Fern make the case for the prosecution when he said: "Telling people to plant trees is like telling them to drink more water to keep down rising sea levels."

Dr Anderson said: "Even if the trees do survive, if we have climate change and a 2C or 3C temperature rise, then how do we know those trees are not going to die early and break down into methane and actually make the situation worse."

Scientific doubts over the value of carbon credits from forest projects led to their exclusion from the mandatory European emissions trading scheme, the industry-focused, bigger brother of the voluntary offset market.

Uncertainties

Mr Mason accepts there is a "swamp of uncertainties" around forest projects but argues they can make a contribution if they are monitored and managed carefully. He is less sure of projects that pay carbon credits for not cutting down existing trees - the Carbon Neutral Company buys credits from a California scheme in which US landowners receiving tax breaks for signing over the rights to chop down mature redwood forests.

Both companies say they are moving on from tree planting projects and aim to limit them to 20% of their portfolios. Of 380,000 carbon credits sold by the Carbon Neutral Company last year, 262,000 were from clean technology and renewable energy projects.

Typical is a scheme that supports the introduction of efficient cooking stoves to people in Eritrea, who had previously used open fires. HSBC has bought credits from a windfarm in New Zealand and both Climate Care and Carbon Neutral Company have projects that distribute energy efficient lightbulbs, in the Marshall Islands and Jamaica respectively.

(Most offset projects are based in the developing world because these countries have no obligations under the Kyoto protocol, which requires industrialised countries to cut emissions.)

There are concerns about whether the projects deliver the promised savings. The credits from some projects, such as HSBC's windfarm, already up and running, are based on carbon already saved. Other schemes, such as Carbon Neutral's Jamaican lightbulbs, are in place but sell credits based on carbon to be saved over the following six years, the anticipated lifespan of the bulbs. Some projects try to sell credits to raise finance for ideas still on the drawing board.

The problem with these schemes, according to Jutta Kill of Fern, is that they are based on predictions. "All those projects are funded on calculations of how much carbon they supposedly reduce compared to what would have happened otherwise. But that is a hypothetical situation and can't be verified. As a basis of a trading mechanism, that's kind of shaky. If the carbon market had been active in 1988 then East Germany would have been a prime target for energy saving projects. But how many predictions of baseline emissions would have included the fall of the Berlin wall?"

Jonathan Shopley of the Carbon Neutral Company said it employed experts to monitor and verify performance. Carbon credits from failed schemes and those that underperform were accounted for, he said, and made up using other projects. "Some projects overperform and some underperform, that's why we have a broad portfolio," he said.

This is not enough for hardline anti-offset campaigners, who complain that such shifting of carbon liabilities between future projects amounts to an environmental Escher staircase, with the promised savings never reached.

Such concerns are compounded by the fact that the market in carbon offsets is voluntary, with no regulation and no independent standards. Others talk of hedge funds trying to offload thousands of suspect carbon credits on unsuspecting consumers and sharp practice where project managers have sold the same carbon credits four or five times.

Francis Sullivan, a carbon offset expert who led HSBC's efforts to neutralise its emissions, said: "There will be individuals and companies out there who think they're doing the right thing but they're not. I am sure that people are buying offsets in this unregulated market that are not credible."

Industry standard

Mark Kenber of the Climate Group said: "It's quite a cowboy market at the moment. If you look at whether it's got the potential to reach 100m tonnes and make a significant dent in emissions then I think some kind of standard is going to be needed." His group plans to launch such a standard this year, which he says would ensure projects delivered the required savings and that resulting credits were not sold more than once.

It would also tackle the twin problems of whether a project would not have taken place without the carbon investment, and its carbon "leakage", whether it could indirectly increase emissions elsewhere (such as legions of German day-trippers driving to see the restored Klobikau eco-park).

Both Climate Care and Carbon Neutral Company say their operate their own standards and work hard to ensure the credits they sell are reliable. But Mr Mason admitted: "Until there is an international register [of carbon credits] I could not put my hand on my heart and say someone is not defrauding us."

Rapid expansion of the market with thousands of new "carbon saving" projects in the pipeline, all eager to cash in on the growing trade, could undermine its credibility, he added. "The quality of the player at the other end has always been our safeguard, but I'm not sure that is always going to be true."

How credit scheme works - or does it?

Carbon offset schemes are designed to neutralise the effects of the carbon dioxide our activities produce by investing in projects that cut emissions elsewhere. They work through the rapidly growing trade in carbon credits, each worth the equivalent of a tonne of carbon. Offset companies typically buy carbon credits from projects that plant trees or encourage a switch from fossil fuels to renewable energy. They sell credits to individuals and companies who want to go "carbon neutral". Some climate experts say offsets are dangerous because they dissuade people from changing their behaviour.

The offset business works on similar lines to the mandatory (and carefully scrutinised) carbon trading scheme imposed on large European companies under the Kyoto protocol, the international agreement to cut greenhouse gas emissions. Companies operating under Kyoto restrictions buy carbon credits called certified emission reductions (CERs). Offset companies usually buy credits on a different market, called voluntary emission reductions (VERs), though most claim this actually stands for verified emission reductions.

CER credits are typically 2-3 times more expensive than VER credits, despite both representing one tonne of carbon "saved" from the environment. Analysts say this price difference reflects a perceived difference in environmental credibility.

Because the offset trade is voluntary, it is unregulated. Most companies operate their own standards but there is little independent scrutiny and no global registry to record the transfer of voluntary carbon credits. Experts warn this means customers could be ripped off, with little or no benefit to the environment. They are worried that individual credits could be sold several times to different buyers and that the projects may not deliver the promised savings.

The carbon credits at the heart of the schemes rarely pass directly from the project that generates them to the polluter who buys them. Like any financial market there are brokers and middlemen, of which Climate Care and the Carbon Neutral Company are the best known in the UK.

Between them, the two companies traded some 475,000 carbon credits last year, each sold for about £6.50. Both are run as money-making businesses: Climate Care's mark-up on the credits it buys is about 35% and Carbon Neutral makes between 40% and 60%. Both point out that this amount is not profit and must cover their costs, such as project management.